Thursday, February 14, 2008

Fiduciary Responsibilities of Members of Boards of Directors

Almost anyone who has been elected or appointed to an association's board of directors has been told that they have "fiduciary responsibilities" to the organization and its members. Too often, that phrase is misunderstood and is interpreted solely as a responsibility to protect the organization's money.

Fiduciary responsibilities are much broader than simply protecting an organization's money. Instead, they span two fundamental duties of a director: the duty of loyalty and the duty of care. First, it is important to understand the role of a fiduciary. A fiduciary, also known as a trustee, is a person or entity with a responsibility to another person or entity, the latter known as the principal or beneficiary. A fiduciary is expected to be utterly loyal to the person or entity to whom they owe the duty. The fiduciary must subordinate personal interests before the duty, and must not profit from the position as fiduciary, without the consent of the principal.

In the case of associations, the members of the Board of Directors are the fiduciaries and the members of the association are the principals or beneficiaries. A summary of the duties of a fiduciary are as follows:

Duty of Loyalty
Under a fiduciary's duty of loyalty, the association's interests must be treated as paramount. The fiduciary's business and personal interests must be subordinate to those of the association and its members.

In associations, it is common for conflicts of interest to be present among members, including board members. Fiduciaries are not necessarily precluded from having conflicts of interest, but when they exist, they must be properly handled. For example, fiduciaries must disclose any conflicts of interest and must, when necessary, recuse themselves both from discussing issues and from voting on or influencing decisions with respect to that conflict.

Fiduciaries are expect to exercise “good faith” in their dealings and decision-making on behalf of the principal and must operate with honesty and integrity, keep confidences, and support board actions publicly.

Duty of Care
Under a fiduciary's duty of care, he or she must be diligent in the performance of fiduciary functions and must, therefore, attend and participate in Board meetings, receive and read reports, and make informed decisions. The duty of care carries with it a responsibility for the fiduciary to understand the association’s activities. That includes having a familiarity with the association's business/financial status. To have the proper familiarity, the fiduciary must review financial statements and must approve an annual budget.

Simply ensuring that there is money in the bank is not fulfilling one's fiduciary responsibilities as a director on an association board. The director must be an active participant in looking out after the affairs of the organization and must represent the interests of the organization's members. He or she must be able and willing to sacrifice his or her own interests to assure that the interests of the members at large are protected.

In a sense, a director's fiduciary responsibilities are akin to those of a parent: protecting the organizational "child" by knowing what and how it is doing and by putting the needs of the "child" first.